WASHINGTON -- U.S. manufacturing expanded in February for the first time in nine months, adding fuel to an economy benefiting from rising incomes and increased construction spending, new reports show.

The National Association of Purchasing Management's factory index rose to 52.4 last month from 49.5 in January as production, orders and hiring all gained. It was the best reading since April's 52.5.

"The signal from this survey is clear: The manufacturing slowdown is over," said Ian Shepherdson, an economist at High Frequency Economics in Valhalla, N.Y.

Another report showed that incomes for U.S. consumers rose 0.6 percent in January after falling 0.1 percent in December.

Spending slowed to a 0.3 percent gain in January as Americans bought fewer cars, after increasing 0.7 percent in December, Commerce Department figures showed.

And construction spending rose 1.6 percent in January, the largest gain in seven months and a bigger increase than December's 1.4 percent, the department said.

Manufacturing was the one weak spot in the U.S. economy last year, as housing and consumer spending surged to records. As factories rebound, the economy's expansion is on track to begin a ninth year in April and set an all-time record for longevity a year from now.

Government bonds plunged as the signs of strength heightened concerns that the next move by Federal Reserve policy-makers will be to raise the overnight bank loan rate above the current 4.75 percent to guard against an acceleration of inflation.

"This is an economy where the batteries haven't run down," said Tim O'Neill, chief economist for Harris Bank and the Bank of Montreal in Toronto. "The slowing that everybody had expected hasn't materialized.

The U.S. Treasury's 30-year bond fell more than 1.375 points, pushing up its yield 9 basis points to 5.66 percent, the highest since August. The implied yield on the federal funds futures contract for July rose 4 basis points to 4.99 percent. The yield on the future suggests that investors are betting on a quarter-point increase by then.

Rising market interest rates may do the Fed's work, however, Federal Reserve Bank of New York President William McDonough said in Albany, N.Y.: "Free-market rates have backed up in the last two weeks -- mortgage rates and government securities. That will have a slowing effect on the economy."

His comments suggested that Fed policy-makers might decide to hold the overnight bank rate steady.

The Dow Jones industrial average rose 18.20, to 9,324.78, yesterday, and the Nasdaq composite index rose 7.15, to 2,295.25. The Standard & Poor's index of 500 stocks fell 2.17.

While the reports were all up arrows for the economy, January's income gain may be difficult to replicate in the months ahead because it includes the yearly federal cost-of-living adjustments and pay increases for civilian and military personnel. Spending was restrained by a 2.1 percent decline in big-ticket durable goods, such as automobiles, after a 3.3 percent increase in December.

The NAPM report showed that the production index, a gauge of current output, rose to 56.9 in February from 53.1 in January.

The new-orders index rose to 57.2 in February from 51.3 during January. And the employment index, a gauge of hiring plans and labor market conditions, rose to 45.0 in February from 44.8 in January.

NAPM index readings above 50 mean that more manufacturers say business improved than say it deteriorated.

Pub Date: 3/02/99